Ethereum will shortly update the consensus protocol from proof-of-work to the much awaited proof-of-stake algorithm.
Why is this switch required from proof-of-work ?
In proof-of-work an expensive computer calculation (mining) is used to verify the legitimacy of a set of transactions (block). The first miner that solves the proof-of-work problem is rewarded with a cryptocurrency price. Resulting into a new block added to the chain.
All this computation requires extensive amount of computational power which translates to huge amount of electricity.
In a recent research, experts argued that bitcoin transactions may consume as much electricity as Denmark by 2020. This is due the fact that most of the cryptocurrency mine using proof-of-work.
Apart from the cost involved. The increased in computation power introduced the concept of pooling. Meaning individuals pool together their computational power to mine blocks. This creates what is known as the 51% attack. If someone controls 51% of the computational power to mine a cryptocurrency they could invalidate transactions and technically change the block history.
What is proof-of-stake ?
There are different proof-of-stake variations. However the following the main concept.
In proof-of-stake the entity validating the blocks will use his own money as guarantee to validate the block. If the transaction is fraudulent the guarantee is lost. Also important to note that the coin value used as guarantee needs to be higher than the value of the transactions contained in the block.
Also important to note that the validators is not given a reward but a transaction fee.
This scheme is more fair when compared to proof-of-work. In proof-of -work the more money you can invest the cheaper the hardware will be as you can by in bulk. Also with more money you can purchase high end hardware which is will be logarithmically more performant when compared to a cheaper alternative.
Proof-of-stake allows even distribution of work across across the network.
How will proof of stake is implemented in Ethereum.
Ethereum implementation of work-of-stake is called Casper, which is a POS protocol. It is based on Byzantine Fault Tolerant (BFT) Proof of Stake protocol.
Validators are randomly assigned the right to propose blocks. Validators are chosen in round robin to vote on a block. A block is validated if it receives 2/3 of the votes.
The following is a resume of the most important aspects.
- A validator requires a stake of ether. This key that controls the ether is used to vote on the block segments being appended. As of the lastest updates you need a minimum of 1.5K ether to be a validator. Which at the time of writing this article, translates to 1 million dollars.
- A validator is rewarded with Ether proportional to the amount staked ether in the system at a rate of 1 to 5 percent.
- Any node that attempts to vote inappropriately will end up being evicted from the network and lose the stake depending of the infringement.
- Validators can report infringements to the system. Validators will be rewarded for reporting any infringements.
- Slashed ether is “burned” from the system.
- A validator can logout and stop being a validator but the it can take up to 4 months to gain access of the stacked ether. This is required to allow enough time for the system to ensure that the validator was not involved in any wrong doing.
